No doubt about it, expenses always seem to be going up. Employers know that their employees are tightening belts and are looking for ways to help even if significant pay raises aren’t in the current budget. For employees with families and dependent care expenses, there is a benefit some employers can offer, at least for the moment, and that is the Dependent Care Flexible Spending Account (FSA).
The Dependent Care Flexible Spending Account is different from a Dependent Care Assistance Program (DCAP). Under a DCAP, employers reimburse employees for dependent care expenses, makes payments to third-parties for dependent care, or provides a dependent care facility for employees. The program must be documented in a written plan and offered exclusively to all employees of the company. DCAPs must comply with requirements of the IRS Code Section 129.
DCAPS that are included as part of a Sec. 125 cafeteria benefit plan often meet the Sec. 129 written plan requirements. A DCAP is not right for every business because every DCAP is subject to specific criteria and nondiscrimination testing (NDT) testing.
How is a Dependent Care FSA is different from an employer-provided DCAP?
Although the IRS views a Dependent Care FSA as a DCAP, which means it must generally comply with the requirements applicable to an employer-provided DCAP, there are several differences of significant note.
First, DCAPs are not group health plans, which means the federal rules that apply to health plans do not apply to DCAPs that are FSA programs.
Second, the Dependent Care FSA is funded by participating employees with pre-tax dollars up to a maximum of $5,000 ($2,500 for married individuals filing separately), and funds can be used only for dependent care.
In addition, funds available for reimbursement are limited to the funds that have been contributed to the account to that point. In other words, even if $4,000 in expenses have been incurred, only the amount contributed to date can be reimbursed.
What else do you need to know about Dependent Care FSA benefits?
There are a few other important points to mention:
- The employee designates the amount (up to the maximum allowable) to be contributed from each paycheck.
- Unless the plan provides for (up to a 2 ½ month) grace period at the end of the year, employees will forfeit any funds remaining in the Dependent Care FSA at the end of the year. If there is a grace period, any remaining funds are forfeited at the end of the grace period.
- Employees must be furnished, on or before January 31, a written statement about DCAP contributions. This requirement is usually met by accurate reporting on the Form W-2.
Bear in mind that this type of an account is not strictly for childcare. You could have employees who are also caring for elderly parents or adult children with disabilities.
Whether or not a Dependent Care FSA is right for your business and your employees, takes some expert review, so contact your accountant and tax attorney to help you make that determination.
But once you have made the decision to pursue this benefit for your employees, the easy part is done. Taking deductions, making deposits, and accurately tracking them requires an experienced hand, too. That’s one of the reasons so many small business owners outsource and rely on The Payroll Department. With more than two decades of payroll processing experience in dealing with the rules and regulations of state and federal tax laws and the IRS, we know how to track and manage the records to keep your company in compliance.
Don’t ever take chances with laws, taxes, or your employees’ payroll. Get expert advice, expert help, and with that, peace of mind that you are doing good by your workers and what you need to do to stay in line with the government.
-Elaine of The Payroll Department Blog Team